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Deflation will continue for years { September 10 2003 } Original Source Link: (May no longer be active)
http://www.abqtrib.com/shns/story.cfm?pk=SOUNDMONEY-09-10-03&cat=FFhttp://www.abqtrib.com/shns/story.cfm?pk=SOUNDMONEY-09-10-03&cat=FF
Deflation will continue for years
By CHRIS FARRELL
Scripps Howard News Service
September 10, 2003
- The recovery is finally here. The economy's momentum is unmistakable.
Orders are up and business is investing for growth. Profit margins among the approximately 2,300 companies that have reported second quarter results are now close to levels reached before the recession, according to the economic consulting firm, Economy.com. The stock market has largely held onto the gains of recent weeks. Apoplithorismosphobia is receding, too. That's Greek for fear of deflation or, perhaps more correctly, the fear that deflation signals depression, says Mark Thornton, senior fellow at the Ludwig von Mises Institute in Auburn, Alabama.
So, is that it? Can we safely put away our books on the Great Depression, 19th century deflations and Japanese economic history? Hardly.
Deflation isn't a temporary consequence of the 2000 to 2003 downturn. Deflation is a signal that the age of inflation is over. The emergence of deflation reflects the spread of market capitalism and the rise of the global financial markets. Both trends will only gain influence in coming years.
The trend toward deflation is a secular undertow of the global economy. Capitalism is spreading worldwide, a phenomenon that intensely increases the competition for markets and profits. When markets are large and laws allow people to easily build companies and keep their profits, more and more talented people become entrepreneurs, innovators and wealth-creators. That competition puts relentless downward pressure on prices. The global financial markets also won't allow for resurgence in inflation. And technologies like the Internet allow consumers to shop for the lowest price anywhere in the world.
Taken altogether, America's overall price level is poised to remain relatively stable, on average, with a slight downward bias. A $100 dollars today might be worth $100 dollars 10 years from now, or even in 20 years. That's not the same thing as saying the value of money won't change along the way.
As we all know, an average Lake Erie never freezes and the stock market returns 10 percent a year, right? Price stability on average translates into brief, virulent bouts of inflation and long periods of deflation, marred by brief frightening plunges in the overall price level.
Take the period 1870 to 1920. Consumer price inflation averaged .7 percent a year for that 50-year time span. From 1870 to 1896, overall consumer prices fell by around 1.5 percent annually, with deflation far worse in some years, such as the depression of 1893. Consumer prices unevenly rose by 2 percent a year from 1896 to 1914, soared during World War 1, and collapsed during the brief depression of 1920-21. Indeed, the 56 percent price drop from May 1920 to mid-1921 might be the steepest in U.S. history.
We are still in the middle of the transition from a world of persistent inflation to one of persistent deflation. The transformation will affect how we look at the world, what public policies we argue about, the innovations we will marvel at and the quality of everyday life.
(Chris Farrell is co-host of Sound Money, a national financial program produced by Minnesota Public Radio. Reach him at www.soundmoney.org or call 1-800-537-5252.)
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